The Best Example Of Regulatory Overkill

Today’s blog is for two groups of readers: First it is for those of you visiting Dysfunction Junction(AKA Washington DC) and thinking of how best to articulate to your elected representatives the negative consequences of the regulatory frenzy that the CFPB, aided by some of the very lawmakers you will be meeting with, has unleashed on the financial sector. The second group I am speaking to are those of you responsible for making sure that these regulations, whether or not we like them, are implemented in as timely and cost-effective a manner as possible. It’s time to move this one to the front burner even though most of it doesn’t take effect until 2018.

I am referring to the CFPB’s changes to Regulation C which implements the Home Mortgage Disclosure Act. Enacted in 1975, HMDA is intended to provide the public, examiners and regulators with a baseline of information about mortgage lending activity particularly in poorer areas. HMDA’s why credit unions over a certain asset size have to collect mortgage applicant information in a Loan Application Register.

The CFPB has used its authority and gone too far. It has transformed HMDA into a vehicle for consumers, regulators and lawyers to second guess every mortgage underwriting decision made by your institution. For example, the regulation doubles the amount of data points that must be collected when taking a mortgage application. This additional information includes the address of the property securing the loan instead of the census track in which it is located; the Credit score relied on and the name and version of the credit scoring model. Combine this information with laws making it illegal to have lending policies that have the effect of discriminating against potential homebuyers and I’m not exaggerating when I say that your credit union has to prepare for a day in which all of its mortgage lending decisions are open to scrutiny and liability.

Why is this bad? Because a world in which lenders are presumptively prejudice will ultimately hurt and not help the people it is intended to help. For example regulators say they want credit unions and community banks to use their knowledge of their members to think outside the box when it comes to making mortgage loans but the safest way to comply with this new HMDA rule will be to let your computer model make all of the lending decisions.

Aside from the questionable assumptions animating this regulation are the very real costs involved in training staff, updating computer software yet again and insuring that the regulation is complied with on an ongoing basis.

I would also point out that no single regulation is implemented in a vacuum. If all your compliance team had to do was very about getting HMDA compliant by 2018 so be it but this is just one of several new lending regulations not to mention coming changes to MBL loans and risk based capital.

Defenders of the Bureau might point out that it does exempt smaller institutions from some of its mandates. For example The HMDA changes to which I am referring Begin n in 2018 and only apply to financial institutions that originate at least 25 covered closed-end mortgage loans in each of the two preceding years or at least 100 covered open-end lines of credit in each of the two preceding calendar years, meet the HMDA asset threshold and have a branch or office in a Metropolitan Statistical Area.

But exempting some credit unions doesn’t change the fact that today more credit unions are subject to more regulations-to guard against the recurrence of conduct in which they did not engage-than ever before.

I would tell your congressman that it’s time to let all institutions catch their breath for a few years. It makes sense to examine the impact that all of these changes have on lending practices and consumer access. I would also suggest to them that they have created a Bureau with too much power to disregard the costs involved in implementing their well-intentioned but often misguided policy nostrums.